Brexit Update

This week was quite packed in fundamental events. The Federal Reserve held a policy meeting and chose not to hike interest rates, which in turn prompted the USD to relax a little. The European Central Bank continues to be committed to dovishness, as the economic climate in the eurozone is not very favorable towards a policy tightening right now. Meanwhile, in the United States President Trump is balancing his time between trade negotiations with China and internal politics, as he continues to threaten with another government shutdown if he does not get his desired wall funding. However, our pick for the most important event of the week goes to Brexit once again: this past Tuesday the United Kingdom Parliament voted to support Theresa May’s deal. What does that mean?

After the initial deal that Prime Minister Theresa May spent over a year negotiating with the European Union failed to gather enough supporting votes in Parliament, May was given the almost impossible task of drafting a different proposal in less than a week. Knowing that time is not enough to even roughly outline a new bill, May focused all of her attention on reigning back people from within her own Party by rallying around the one major issue in the deal that made most MPs vote it down: the Irish backstop.

The backstop is a provision part of the Brexit deal that the European Union insisted on. Since Ireland is an EU member, but Northern Ireland will be leaving as part of the United Kingdom, legislators from both the UK and the EU tried to come up with a way to avoid a hard border between the two Irish countries. The backstop essentially means that Northern Ireland will remain in a customs union with the EU and goods shipped there from the rest of the UK will have to go through a customs check. This isolates Northern Ireland from the rest of the United Kingdom, which is why it is so heavily opposed in Parliament. However, the backstop will not be implemented if the UK and the EU reach an agreement regarding trade and customs before the end of 2020. The backstop is only a last resort, a guarantee to protect the EU’s borders in case other agreements are not reached.

May tried to convince Parliament that it won’t actually come to that, as they would surely be able to negotiate more in the coming months, but this wasn’t convincing. In this week’s debate and vote, MPs showed that they do not support the backstop and want it out of the deal. Right now the Prime Minister has to focus on talks with Brussels in an attempt to convince them to change the withdrawal agreement signed between the United Kingdom and the European Union last year.

Is that likely? Not at all. The EU has been adamant about the agreement being binding. Everything the two parties signed on in November is non-negotiable. Moreover, the UK really doesn’t have much else left to offer in order to convince the EU to change their stance. At this point, regardless of how the British parliament feels, the deal cannot be changed.

It seems that now the United Kingdom is still stuck with a deal they do not support – and if it is confirmed that the backstop cannot be removed, then MPs will have to vote the deal down once more. This leaves the United Kingdom with no deal at all. Yet Parliament also voted on ruling out a no-deal Brexit. That vote is not legally binding, so will the government respect it? Right now the UK’s Parliament doesn’t want to leave with no deal, is not happy with the current deal, and cannot get a new one. This makes them pretty short on options. So what’s next?

The EU’s lawyers have previously stated that the United Kingdom has the right to cancel Brexit. If they choose to remain in the European Union, no one will contest it. Opposition leader Jeremy Corbyn is also receiving a lot of attention. While he wants a customs union with the EU and is against a hard Brexit, he hasn’t declared himself outright in support of a second referendum. But with less than two months left until the United Kingdom and the EU have to part ways, it is time for the UK to come forward with a concrete position and be prepared to defend it.

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